Strategic Planning: Tesco - Activity

Tesco is a success story - it was the first UK business to make £2 billion in profits when it announced the feat early in 2005. Despite this, the share price fell when its results were announced. Why?

Tesco opened its first store in Edgware, North London in 1929. It gets its name from the combination of the founder of Tesco, Sir Jack Cohen and a partner in a firm of tea suppliers who Cohen worked with, T.E. Stockwell. Since that time, the company has grown and has reflected the changes in retailing. Prior to the Second World War, most grocery stores served customers but self service stores were on their way and, once introduced, allowed stores to grow bigger to become the superstores we know today.

The company floated on the stock exchange in 1947 with an initial share price of 25p. Tesco became a familiar name on the high streets of the UK and whilst it was able to take advantage of commercial economies of scale through bulk purchase of supplies, the existence of resale price maintenance restricted the ability of Tesco to be as competitive as trading conditions now allow. The system allowed suppliers to insist that retailers sold their products for a set price. Tesco used other strategies to build customer loyalty including the use of stamps that could be exchanged for cash or goods.

The Tesco strategy up to this time was encapsulated by the title of Cohen's autobiography, 'Pile it high and sell it cheap', but the increasing affluence of customers and the changing needs meant that Tesco altered its approach and moved into opening out of town stores with more attractive interiors. Such refurbishment was also carried out in the existing stores and with the onset of selling petrol at some of its stores it broke the £1 billion turnover level in 1979.

The 1980s saw a continuation in the growth of new stores and also the development of new initiatives. In 1985, Tesco announced its Healthy Eating options with nutritional information and advice on some of its own branded foods. By the 1990s, the move to overtake the other major supermarkets was well under way. The emphasis was on finding new ways of satisfying consumer needs and building customer loyalty. A range of new services and facilities were introduced, including Tesco Metro, a store concept aimed at the high street customer but offering the benefits of a large supermarket. In some respects, this was Tesco returning to the high street after selling off many stores in the 1960s and '70s in the move to join the out-of-town shopping trend.

A similar move saw the advent of Tesco Express, a petrol station with a supermarket providing local shoppers not only with petrol at competitive prices but also a range of essential grocery items. This type of approach also extended to the Tesco Extra stores where both food and non-food items were sold. This proved a direct challenge to some of the larger Asda supermarkets that had sold non-food items like white goods (washing machines, fridges, etc.), gardening equipment, kitchenware, clothing, CDs and so on for some time. Sainsbury's meanwhile kept its food and non-food services separate with the development of the Homebase chain.

Tesco's Turnover, Number of Stores and Selling Space, 2001-2005

Source: Tesco Annual Review, 2005 p. 2 [PDF, 3.2 MB] (http://www.tescocorporate.com/images/Tesco_review_1.pdf)

In 1995, Tesco introduced the Clubcard, a loyalty card for customers who were able to collect points from purchases and use them to exchange for goods. It also gave Tesco a massive amount of information about the customers who visited its stores, what they bought, the regularity with which they bought them and how they responded to the in-store promotions and special offers. Sainsbury's dismissed the card as a gimmick but were soon to lose out on sales to Tesco and in the latter part of 1995, Tesco became the market leader with a market share of 17%.

Throughout the 1990s, Tesco introduced further measures to improve its service and the range of goods and services it offered its customers. This included such things as making staff available to help customers pack bags and take them to the car, having a policy of opening checkouts if there was more than one person in a queue, linking in with the Airmiles group in relation to its Clubcard and the provision of facilities such as baby changing units, restaurants and coffee bars.

Apart from the basic services it was providing, it was building on the range of products it was offering. It opened pharmacies in some stores, developed a range of financial services including a Visa card, mortgages, insurance and a bank account all in conjunction with the Royal Bank of Scotland. The expansion of the non-food side included offering entertainment goods such as TVs, DVD players and home entertainment systems as well as white goods, household products, clothing and so on. Its well-publicised battle with Levi's over the selling of jeans at prices considerably below that of Levi's outlets was lost but not before Tesco had presented itself as a champion of the customer in its battle to bring quality and value for money to the retail supermarket scene.

In the new century, further developments pushed Tesco's profits higher still; it introduced shopping via the Internet and home delivery, Internet service provision, and a range of foods reflecting different qualities from the 'Value' range which had been introduced in 1993 through to its 'Finest' products as well as a brand called 'Free from' for customers with special dietary needs.

Tesco's Summary Profit and Loss Account, 2005

Source: Tesco Annual Review, 2005 p. 42 [PDF, 3.2 MB] (http://www.tescocorporate.com/images/Tesco_review_1.pdf)

Tesco has also taken steps to expand abroad. It has acquired stores in Japan, China, Taiwan, Poland, Slovakia, Ireland, Turkey, South Korea and Malaysia amongst others and has links with Safeway Inc in the United States. It continues to try to improve the quality of its customer service provision and the range of goods and services it is offering. It did make a bid to takeover the Safeway group when Morrisons initially put in a bid. However, it was unlikely to ever succeed in this given the market share it now has in the supermarket business.

Given this massive growth, Tesco announced a profit of over £2 billion for 2004 - the first UK supermarket to break this barrier. The fall in the share price reflects what analysts expect to happen in the future rather than what has happened in the past. So where does Tesco go from here? Have they reached a peak from which there is now only a downward trend or are there strategies that Tesco can put in place to cement their position in the market and continue to expand in the future?

Tesco's Summary Five Year Record

Source: Tesco Annual Review, 2005 p. 44 [PDF, 3.2 MB] (http://www.tescocorporate.com/images/Tesco_review_1.pdf)

Market Share of the Top Four Supermarkets (%)

* Follows Morrisons' takeover of Safeway
Sources: BBC News(http://news.bbc.co.uk/1/hi/business/4694974.stm) and Yahoo UK(http://uk.yahoo.com/)

Tesco's Share Price (July 2004 - May 2006)

Source: London Stock Exchange (http://www.londonstockexchange.com/en-gb/pricesnews/prices/system/detailedprices.htm?sym=GB0008847096GBGBXSET10884709TSCO)

Useful information sources:

• Tesco's Strategy - hover over 'Presentations & Results' and select 'Presentation Archive', then scroll down and select 'AGM Presentation - 18 June 2004'(http://www.tesco.com/corporateinfo/)
• Summary of Tesco's results (http://tesco.grouptree.co.uk/page.aspx?pointerid=401CA512F5314805AC6456FA62FD1D21)
• Tesco's Corporate Information (http://www.tesco.com/corporateinfo/)
• Tesco Annual Review 2005 [PDF, 3.2 MB] (http://www.tescocorporate.com/images/Tesco_review_1.pdf)
• Tesco share price - from the London Stock Exchange (http://www.londonstockexchange.com/en-gb/pricesnews/prices/system/detailedprices.htm?sym=GB0008847096GBGBXSET10884709TSCO)